As economist David Ricardo pointed out in 1817 in the “On Wages” chapter of his book On the Principles of Political Economy and Taxation, take-home pay is also generally what a person will work for. Employers know this: Ricardo’s “Iron Law of Wages” is rooted in the notion that there is a “market” for labor, driven in part by supply and demand.
So, if a worker is earning, for example, a gross salary of $75,000, his 2009 federal income tax would have been about $18,000, leaving him a take-home pay of $57,000. Both he and his employer know that he’ll do the job for that $57,000 take-home pay.
So let’s take a look at what happens if the government raises income taxes. For our average $75,000-per-year worker, his takehome pay might decrease from $57,000 to $52,000. So, in the short run, increased taxes have an immediate negative effect on him.
But here comes the part the conservatives don’t like to talk about. Our own history shows that within a short time—usually between one and three years—that same worker’s wages will increase enough to more than compensate for his lost income.
Similarly, when the government enacts a tax cut, workingclass people’s taxes go down; but sure enough, over time, their wages also go down so their inflation-adjusted take-home pay remains the same.
Taxes as the Great Stabilizer
Beyond fairness, holding back the landed gentry that the Founders worried about—America had no billionaires in today’s money until after the Civil War, with John D. Rockefeller being our first—in and of itself is an important reason to increase the top marginal tax rate and to do so now.
Novelist Larry Beinhart was the first to bring this to my attention. He looked over the history of tax cuts and economic bubbles and found a clear relationship between the two. High top marginal tax rates—generally well above 60 percent—on rich people actually stabilize the economy, prevent economic bubbles from forming, prevent the subsequent economic crashes, and lead to steady and sustained economic growth as well as steady and sustained wage growth for working people.
On the other hand, when top marginal rates drop below 50 percent, the opposite happens.
The math is pretty simple. When the über-rich are heavily taxed, economies prosper and wages for working people steadily rise. When taxes for the rich are cut, working people suffer and economies turn into casinos.
So why is it that Americans have come to believe that tax cuts are good for everyone? The answer is that for decades now the überrich have relentlessly spent money to make Americans believe that lower taxes are the answer to all of America’s problems. They’ve done this partly through the media they own and partly through funding “think tanks” that legitimize their Great Tax Con.